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16 comments on “Prospect tells us all what really happened in the Crash”

The guy is wrong on several points of detail.
First Northern Rock had significant exposure to subprime mortgages with lots of LTV in excess of 100% (or do only US sub-prime mortgages count?). Second retail deposits (at the time) were only guaranteed up to £30k and it was a retail deposit bank run that was triggered by Peston and the BBC. Third Northern Rock had no impact on US mortgage defaults that triggered the crisis in the USA.

John77. Lots of NR >100% LTV mortgages were based on the rationale that, taking consumer credit into account, most borrowers already had >100% equity in combined debt. So as part of a credit repair proposition they could consolidate all that into a mortgage which had lower immediate cash flow cost such they could service and repay these debts.

I still recall how, I think about 6 months before the Northern Rock bank run, I was in an investors meeting and asked fund manager Baillie Gifford whether it was really such a great idea to invest such a large percentage in the bank, given the noises we were starting to hear from the US. Apparently it was, strong business model etc.

@ LPT
USA irrelevant to Northern Rock.
Unfortunately, however, auditors signed on NR accounts wherein the numbers contradicted the words, so the average guy who reads words instead of numbers would have thought everything was hunky-dory.
I wasn’t officially a banking analyst at the time (got moved to Small Companies in 1987) so no-one was going to listen to me [my mother put most of her spare cash in Northern Rock when it was a decent Building Society before Adam Applegarth took over so i got to see the accounts].

Icelandic banks were also under the weather as well before the crisis hit. Lots of people made out like bandits on the credit side of those banks before the crash in short positions or CDS.

Lots of people I know were better off after the crisis as they had pulled into cash before or even shorted the right things. Lots of people I know lost their well paid jobs. It was foreseen by many but being contrarian has a high cost until you are proved right. Dot com boom was the same.

Life is tougher as a consequence of all this yet credit bubbles are always being blown to create growth without the underlying hard work to improve productivity.

Will any government have the balls to fully unwind QE and get rid of the fake asset boom? The long-term effects of not doing so will hit that part of the working population just approaching retirement in ways that politicians might find physically painful. Unless they can find a way of increasing the workforce to offset the population decline. And then there’s China with its ageing population… Will they suck in all the productive African migrants?

A good friend was Investment Director of a life assurance company in the 2000s. He was once asked by the CEO what he did to maximise the return on their overnight money. “Nothing” was his reply, “We place it with whichever of the big four are offering the best rate. If I put it out with Kaupþing, we might get an additional 3 basis points, which would earn us an extra £10,000 a year. But if they ever went bust, we could lose the lot.”

I see it as a public service reminder, because we don’t watch TV, to those of us who complacently live in secure high trust areas that there really is a big bad world out there

I’ve been known to wander up to the pub and leave the front door open, not unlocked but open, on more than one occasion. Today Mrs BiND left her studio open as it gets too hot, while she went off to Weymouth and she is super security conscious. I was already out sailing.

@ LPT
One of the problems in the USA was that mortgages in California and Colorado (and a few other states) were non-recourse so the borrower had a one-way bet (heads, I win, tails you lose) which was very different from the UK. Any borrower in the UK was on the hook for the amount of the mortgage regardless of what happened to house prices unless he/she went bankrupt. Secondly UK lenders were not required by President Clinton to lend to racial minorities regardless of credit quality.
Northern Rock’s failure was partly due to Robert Peston but more due to the greed and incompetence of its top management; the lending environment in the UK got lax during the New Labour house price bubble that more than doubled (some say trebled) house prices in ten years but the inevitable bursting of the bubble didn’t sink Halifax or Abbey National or Nationwide or Skipton or …
[Bank of Scotland damn nearly sunk Halifax but that had nothing to do with the residential mortgage book]

Diogenes: Sadly I doubt any government will have the balls to unwind QE. For a start, the losses to their own property portfolios will be too great. Like all such anti-market, centrally planned interventions the effect of QE has been to make the economic imbalances and debts worse. Why do they keep doing such things? My guess is some combination of:
1. Corruption, if only in the “We’ve gotta protect our phony baloney jobs!” sense.
2. Fear of having to confront the electorate with the reality that much of what they want, and have been promised by politicians, is unaffordable.
3. Unwarranted faith in a dismal science that is obsessed by quantity (e.g. of GDP) but cares nothing for quality.